Unemployment Rate is Understated

The Real Jobless Rate is 9.4%

Where have all the people gone? Americans are disappearing, based on data found in the Employment Report's Household Survey. While nothing is ever black and white, and there surely is some net hiring occurring now, we still find the decline in the civilian labor force since late last year quite suspect. In fact, we believe a discrepancy has the unemployment rate understated at 8.9%, when it is in fact closer to 9.4%. Read through this article through "The Problem" section at the bottom where we expose the problem and prove our argument.

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Unemployment Rate Understated

It would seem that Americans are dying off due to depression related ailments, or that they've dropped off the radar into despair since the holidays... or the government is fudging the numbers. The fact is that 761,000 Americans or more are missing from the data.

I think there may be a couple factors at play that are not easily captured by the survey. I think many of the long-term unemployed somehow lost unemployment benefits or got some sort of job when the unemployment insurance extension came up for review last December.

The political debate over whether to extend unemployment insurance was clearly a farce, since severe political damage would have come to any elected official who cut off government aid over Christmas. It was just a bad PR concept. Still, in a recent meeting with a young man on the train, I learned that some people did indeed take softer than optimal employment opportunities in December out of fear of losing their government income stream.

We theorized last year that pushing the extension legislation to the midnight hour might be a good idea for this purpose. While the young man I encountered was clearly a hard working ambitious individual, we cannot deny that there are likely plenty of folks on the government payroll now who are content with the income stream. I know the majority of Americans do not fit into this characterization, but still, it served good purpose to scare the bejeebers out of the few slackers that may have been enjoying an easier (at a low standard of living), though simple lifestyle.

There's another potential reason for the increased employment and decreased long-term unemployed count tied to the December legislation. It is possible that during that short void, when the legislation expired, that some of the folks simply screwed up the paperwork and never got back on government aid. As you may or may not know, the people who run and work within these departments hold to rigid rules that sometimes forsake the good deed they are supposed to be working for.

Or perhaps, when many of the jobless needed to reapply, they simply failed to provide the evidence of job search effort necessary to receive aid. Also, with the budget tight, the government has upped the pressure on welfare recipients and unemployment insurance recipients, in order to ensure that fraud is minimized. It is a shame though that this more likely puts unsophisticated or troubled recipients on the street more often than it uncovers fraud.

Both these just discussed but otherwise never-theorized possibilities could provide some of the answer to the mystery behind the sudden change in the unemployment rate, and the factors behind it.

Unemployment Rate

The unemployment rate was reported improved by a tenth of a percent for February, moving to 8.9%. That is a historic improvement since the year ago 9.7% mark and the 9.8% rate from just three months ago. The unemployment trend was mostly affected by long-term unemployed men finding work. The rate of unemployed women actually worsened by a tenth, to 8.0% in February and was about the same as it stood a year ago. The rate of unemployed men over the age of 20 was 9.4% in December 2010, and stands at 8.7% now.

Just like in January, the number of unemployed Americans who have been jobless for 27 weeks or more dropped precipitously. In February, the count of long-term jobless fell by 217,000. The decline was not as isolated though as it was in January. In February, there was also a 288K improvement in the short-term unemployed (5 weeks or less) and a 106K improvement in between (15 to 26 weeks). Given that the long-term unemployed pool accounts for 44% of the total, we should expect more of them to find work than the other segments.

Part-time job holders, who would rather be working full time jobs, improved by 67,000 in February, to 8.34 million. That is still a huge number of Americans earning less than optimal income, and thus spending less than normally. The "marginally attached" tally improved by 70K, to 2.73 million in February. Remember, these two groups are not included in the unemployed count, but are effectively unemployed and underemployed. We return the two into our equation calculating underemployment.

UnderEmployment Rate

If we add back the 2.73 million (previously 2.8 mln.) displaced workers to the labor market, and include the 8.34 million (previously 8.407 mln. revised) underemployed part-timers in the unemployed count, adjusted unemployment reaches ((13.673M + 2.73M + 8.34M) / (153.246M + 2.73M)) * 100 = 15.86%.

Under-Employment Rate Trend:

February 2011: 15.9%
January 2011: 16.1%
December: 16.7%
November: 17.0 %
October: 17.0%
September: 17.1%
August: 16.7%
July: 16.5%
June: 16.5%
May: 16.6%
April: 17.1%
March: 16.9%
February: 16.8%
January: 16.4%

The Problem

There's just one problem with this calculation that troubles me. The civilian workforce grew by 60K in February, but was still 444,000 short of December's count. Where did all those people go? I suppose more people retire at the end of the year than at other times, so perhaps there is a seasonal issue at play (feel free to contribute if you know this to be true). Anyway, a reduction in the denominator is not a problem in isolation. The problem comes when we compare the change in unemployed with the change in employed over that same span. While 367K more people were counted as "employed" since December, 812K less people were counted as "unemployed." Where did the extra unemployed people go to, some 445K unaccounted for Americans? If we consider they may have retired (from both the labor force and unemployment), then we might find the difference. You see, we have 444K fewer folks in the labor force and a difference of 445K folks between the change in employed and unemployed. Have that many people really retired, fallen ill or died, or have many of them simply fallen off the radar, yet while remaining unemployed?

Since the civilian workforce usually increases, pushed by population growth, let's add back the 444K to both the labor force and the unemployed counts. In that case, we find unemployment goes back up to 9.2% and underemployment increases to 16.1% for February. This makes more sense, and since November's data probably makes even more sense (as it preceded the legislation discrepancies), we estimate true unemployment and underemployment below.

To be more exact, the difference in labor force count from November to February is a 761,000 drop. Where did all those Americans go? The difference in the employed count is +685,000, and the decrease in the unemployed count is 1,446,000. The difference between the employment increase and unemployment decrease matches the 761,000 Americans no longer considered part of the civilian labor force. Therefore, we add back the 761K lost and unaccounted for Americans, and we find February's more likely unemployment rate sits at 9.4% and underemployment at 16.3%. Take note that this would mark an increase from January's true rate of 9.2%. Thus, we see deterioration in the labor market rather than the improvement the raw data seems to offer.



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